Will Main Street Turn into a Ghost Town?

Large corporations are announcing substantial new layoffs now and this trend should continue well into 2009. Slowing demand and anticipated weaker demand next year are precipitating unemployment, even as raw material costs are falling. 

I have no doubt in my mind that the current downturn is going to be prolonged and severe. No industry is immune from the current recession and we’re only at the end of its beginning in terms of the length of time for the cycle to run its course.

All the major industries are laying off workers, including:

automobile manufacturing, real estate, financial services, aviation, appliances, resource production and exploration, telecommunications, and technology. The housing bubble burst so hard that the general economy will be vulnerable to a severe contraction in 2009.

Add in the credit crunch and it’s no wonder that there’s been a forced liquidation in capital markets. It’s also no wonder that the U.S. dollar strengthened as global investors moved into cash in order to manage the storm. The flight to cash has been so strong that even the spot price of gold felt the strength of the forced liquidation. It all happened so quickly, and it’s going to be a long time before this thing is fixed.

Policy makers are quickly running out of options in order to help. Monetary policy in particular has already done pretty much all that it can do. Fiscal policy is what’s left, but massive new government spending always creates unintended consequences.

The biggest risks to the economy going forward are government intervention, on the fiscal side, and inflation, on the monetary side.

Badly managed companies need to be allowed to go bankrupt, reorganize, and be taken over by well-managed companies. It’s not politically easy, but the economic system needs to be able to correct itself, or I fear that the Main Street economy will turn into one gigantic ghost town, like in Japan.

I don’t have a problem with government-sponsored stimulus packages, but I do have a problem with propping up unsuccessful businesses that have made some bad management decisions. It’s economics 101.